If a homeowner or mortgage company does not pay the real estate taxes to the municipality, the municipality may obtain the payment for the balance due by selling a tax certificate. The municipality sells a tax certificate to an entity that pays the homeowners’ taxes. In return, the entity receives a certificate, reflecting the amount paid, plus the interest that is due on the funds paid. If the homeowner or mortgage company does not payoff the certificate, including interest, within two years from the date of the purchase, the certificate owner may commence a foreclosure action against the homeowners’ property.
The state and municipalities establish the amount of the interest rate on the funds paid for the certificate, which may be as high as 18%, depending on the specific certificate.
A homeowner may file a chapter 13 to avoid the tax foreclosure and loss of their property. The bankruptcy code requires that the homeowner payoff the amount due on the certificate, including the interest, through a bankruptcy plan, over a period of 36 to 60 months.
Before 2010, a bankruptcy debtor was required to pay back, the certificate, plus the interest rate, established by the state and municipality for each certificate. However, in 2010, a New Jersey bankruptcy judge wrote an opinion indicating that the interest rate, for the certificate, may be modified to the prime interest rate, plus an additional 1% to 3%, which substantially reduced the interest.
Thereafter, a second bankruptcy court judge wrote an opinion agreeing with this opinion. However, subsequently, two other New Jersey bankruptcy judge’s wrote opinions disagreeing with their decisions and determined that the interest rate should be the amount that is required by the state / municipality.
The various judge’s decisions result in a substantial difference of the interest rate, as the municipality’s rate may be as high as 18% and the rate based on the bankruptcy code is presently about 4.25%, based on the present prime rate and risk.
At the time this blog is drafted, the issue regarding the appropriate interest to be paid through the bankruptcy plan is scheduled to be decided by the New Jersey Supreme Court. However, at present, the amount of interest that must be paid on a tax sale certificate, in bankruptcy, depends on the debtor’s bankruptcy judge’s interpretation of the law.
Robert Manchel, a New Jersey bankruptcy lawyer, may be contacted at (866) 503-5655 to discuss your options for seeking bankruptcy protection.